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Oil and Gas Leases Are Title Transactions Under Ohio Dormant Mineral Act

A lease that grants oil and
gas rights to another party and was recorded with the county recorder is a
title transaction under the state’s Dormant Mineral Act, the Ohio Supreme Court
ruled today. However, the Court concluded, the unrecorded expiration of an oil
and gas lease does not qualify as a title transaction.

In mineral-rich areas, such as Marcellus and Utica Shale regions
of eastern Ohio, rights to the surface property and the minerals below are
often owned separately. However, the mineral interests can be considered
abandoned if 20 years pass without a title transaction or the occurrence of
another event described in the statute.

The Court’s decision, written by Chief Justice Maureen O’Connor,
was unanimous in ruling that the unrecorded expiration of an oil and gas lease
is not a title transaction. The Court divided, though, on whether the leases
themselves are title transactions – with one justice concurring in the judgment
but not the reasoning, and two justices dissenting.

The holding answers questions submitted by a federal court
considering a dispute between the owners of 90-plus acres in Harrison County
and the various companies that have leased the property’s mineral interests.
The case now returns to the federal court for additional proceedings.

Land and Mineral Rights Changed Multiple Times
A mining company split the surface and mineral rights on this Harrison County
land in 1958. Clarence and Anna Bell Sedoris became owners of the land, while
the mining company kept the oil and gas interests.

Throughout the years, the surface property and mineral rights
changed hands many times. The landowners now are Dennis Elias, Jeffrey and
Janice Elias, and Arieh and Sunni Ordronneau. (Kenneth Buell was dismissed from
the case.) North American Coal Royalty Company owns the mineral rights, and
multiple companies, including Chesapeake Exploration, lease parts of those
rights.

In October 2012, some of the lessees of the oil and gas rights sued
the property owners, Coal Royalty, and one of the other lessees in federal
court to “quiet” any claims to those resources. Eventually, Coal Royalty and
all the mineral rights’ lessees were realigned on one side as the plaintiffs in
this case.

Elements of State Law
Ohio’s Dormant Mineral Act, R.C. 5301.56, is part of the Marketable Title Act
and creates a method to rejoin a surface property with abandoned mineral
interests. The act’s purpose is “to clear title and promote the use of the
mineral rights for development and production,” today’s Supreme Court opinion
noted. The original act became law in 1989 and was amended in 2006.

Chief Justice O’Connor explained that while the parties disagree
about which version of the law applies in this case, that question was not one
submitted by the federal court for review. The questions before the Court
involved the meaning of “title transaction,” and the analysis of the issues was
the same under either version of the law.

Oil and Gas Leases Are Title Transactions
The first question was whether an oil and gas lease is a title transaction
within the meaning of the state law. Severed minerals interests can be
considered abandoned and return to the surface property owner unless an event
that saves the mineral interests occurs in a 20-year window.

The law lists six possible “saving events,” including situations
in which the mineral interests have been subject to a title transaction that
has been filed or recorded with the appropriate county recorder.

The Marketable Title Act, which includes the Dormant Mineral Act,
defines a “title transaction” as “any transaction affecting title to any
interest in land, including title by will or descent, title by tax deed, or by
trustee’s, assignee’s, guardian’s, executor’s, administrator’s, or sheriff’s
deed, or decree of any court, as well as warranty deed, quit claim deed, or mortgage.”

Because the law uses the words “any” and “including,” the meaning
of “title transaction” is not limited to only those examples listed, the chief
justice reasoned. The justices dissenting on this issue would limit the
definition to transactions that “alter who owns the property at issue.”
However, the Court’s majority concluded that “is an overly restrictive reading
of the statutory definition.”

“We find that by [the terms of this lease] or substantially
similar terms, the mineral interest has been the subject of a title transaction
because the oil and gas lease affects title to the surface and mineral
interests in land in a number of ways,” Chief Justice O’Connor explained. “As
discussed above, a ‘title transaction’ as defined in R.C. 5301.47(F) is not
limited to a transaction that alters an ownership interest. Transactions
creating interests like easements or use restrictions are also title
transactions. This is consistent with the meaning of the word ‘title,’ which,
as a concept rather than a legal instrument, is defined as ‘[t]he union of all
elements (as ownership, possession, and custody) constituting the legal right
to control and dispose of property.’”

“The lease in this case grants the lessee an unequivocal and
exclusive right to the mineral estate for a fixed term plus an indefinite
extended term upon the happening of certain conditions, such as actual
production of oil and gas or a prescribed payment to the lessor,” she
continued. “Based on the vested nature of this grant, the oil and gas lease has
been construed as transferring to the lessee a fee simple determinable in the
mineral estate with a reversionary interest retained by the lessor that can be
triggered by events or conditions specified in the lease. … Even if the lessor
conveys title to the surface or mineral estates during the lifetime of the
lease to a third party, the lease is binding on those successors and is
therefore an encumbrance that remains with the realty.”

“Additionally, a recorded lease in the chain of title notifies all
others with a potential interest in the surface or the mineral estate that the
land is encumbered. An oil and gas company searching land records for potential
leasable mineral estates would find an estate already encumbered by a lease. In
this way, the lease resembles more of an encumbrance than an easement or a
mortgage. The lease forecloses the ability of the lessor or any third party to
freely access the property for exploration, development, and extraction of
mineral resources.”

Expiration of Oil and Gas Lease, Though, Is Not Title Transaction
On the federal court’s second question, the Court concluded that a lease’s
expiration that is not recorded does not qualify as a title transaction
affecting the 20-year window.

“[T]he terms of a recorded oil and gas lease cannot provide
sufficient notice of activity under the lease to toll the 20-year clock during
the life of the lease, nor can the expiration of such a lease be considered a
‘title transaction that has been recorded or filed’ within the meaning of R.C.
5301.56(B)(3)(a) when the expiration is unrecorded,” the chief justice wrote.
“Accordingly, we conclude that the unrecorded expiration of an oil and gas
lease does not constitute a saving event under R.C. 5301.56(B)(3)(a) that would
restart the 20-year clock.”

Justice Sharon L. Kennedy concurred with the Court’s answers to
the federal court’s questions and with the legal reasoning related to the lease
expiration issue. However, she disagreed with the Court’s analysis of the first
question regarding the meaning of “title transaction.”

Justice Paul E. Pfeifer concurred in part and dissented in part in
an opinion joined by Justice Terrence O’Donnell.

Justice Presents Different Reasons Why Leases Are Title
TransactionsWhile Justice Kennedy agreed that a recorded oil and gas lease is
a title transaction, she disagreed with the majority’s analysis on the issue.

She
first noted that contrary to Justice Pfeifer’s dissent, the General Assembly’s
replacement of the language “conveyed, leased, transferred, or mortgaged” in
R.C. 5301.56 with the more general term “title transaction” indicated an
attempt to broaden, rather than narrow, the types of transactions that qualify
as a saving event.

In her
view, however, the Court’s majority did not need to address whether oil and gas
leases create a specific property interest. Instead, the answer could be determined
by reviewing the relevant statutes alone. She examined the Marketable Title Act
and also the related laws requiring that certain documents be recorded.

“Harmonizing
the provisions of the [Marketable Title Act] with the recording statutes
contained in R.C. Chapters 2113, 5301, and 5309 reveals a commonality with the
examples of title transactions listed in R.C. 5301.47(F),” she wrote. “The
examples are claims or interests against, or in, land that must be recorded
pursuant to the Revised Code. Therefore, construing the recording statutes and
R.C. 5301.47(F) in pari materia, I would hold that any transaction that must be
recorded must be a ‘title transaction’ within R.C. 5301.47(F) because the
purpose of a recording requirement is to ‘provide a public record of
transactions affecting title to land.’”

Two
Justices Conclude Leases Are Not Title Transactions
Justice Pfeifer concurs with the Court’s opinion on the lease expiration issue.
However, he concluded that a recorded oil and gas lease is not a title transaction.
He emphasized that the “title transaction” definition does not include anything
similar to a lease.

“Granted,
R.C. 5301.47(F) does not state that its list of transactions that affect title
is exhaustive, but every transaction mentioned in the statute either actually
or potentially affects an ownership interest in the property,” he wrote. “Since
all of the examples listed in R.C. 5301.47(F) bear on the ownership of
property, it follows that a transaction like a lease, which does not alter who owns
the property at issue, falls outside the scope of the statute.”

He added
that the initial Dormant Mineral Act legislation included the lease of a
property as a saving event, but that language was removed before the bill was
enacted.

“This is
not to say that leases have no role in the [Dormant Mineral Act],” he wrote. “A
saving event occurs when ‘[t]here has been actual production or withdrawal of
minerals by the holder … from lands covered by a lease to which the mineral
interest is subject ….’ Simply put, a lease plays a part in a saving event when
production begins pursuant to the lease’s terms, but not while the minerals to
which it is attached remain unexploited.”

A
recorded lease does not affect the owner’s title to the property and therefore
is not a title transaction, Justice Pfeifer concluded.

Please note: Opinion summaries are prepared by the Office of Public
Information for the general public and news media. Opinion summaries are not prepared
for every opinion, but only for noteworthy cases. Opinion summaries are not to
be considered as official headnotes or syllabi of court opinions. The full text
of this and other court opinions are available online.

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